Partner Meeting: What founders should do when deals aren’t getting done, China’s 20th National Congress and what it means for the global economy, Q3 earnings start to roll in, OFAC sanctions in crypto, and should you have a co-founder

On this week’s Partner Meeting episode we cover the following topics:

• What founders should do when deals aren’t getting done
• Q3 earnings start to roll in
• China’s 20th National Congress and what it means for the global economy
• OFAC sanctions in crypto
• Business Lesson: should you have a co-founder?

‍Transcript (this is an automated transcript):

MPD: Welcome everybody. I'm Mark Peter Davis, managing partner of Interplay. I'm on a mission to help entrepreneurs advance society, and this podcast is definitively part of that effort. Today we're doing our next partner meeting where I talk to a handful of my partners and we cover things like the overall view of the broader market, venture market, blockchain market, and we share some business advice.

Last time I did my first monologue in the history of this short-lived podcast, and today I wanted to share a second thought. My wife and I have long used a phrase insecurity is the root of all evil. And I wanted to share the perspective that as business managers, owners, and operators, We're all aligned and dialed into a bottom line generating revenue and bottom line hitting, trying to hit profit numbers or growth, or whatever it is that our investors and shareholders all think about.

Now, while we can't parent everybody from their childhood on, there is a lot of insecurity and emotional angst felt by a large population around the country, but also within the business. C. To the extent you are listening to this and you operate a company and you have the opportunity to choose to create a greater sense of security, emotional encouragement, and support for people, it is worthwhile.

It will have more than positive impact on short term retention. You will help people find their stronger self and be more successful in their roles. That will have a positive impact in your company. It'll also have a incrementally positive impact on society. Thanks for listening. Hope you enjoy the partner meeting.

Mike, what's up man? Where are you?

Mike Rogers: I'm currently recording live from my good friend's wife's closet because we're in deep diligence on a marketplace for apparel. And I wanted to immerse myself in what it feels like to really understand the product. ,

MPD: you're fired. You know that, right? This is not diligence.

Yeah,

Mike Rogers: it's cool. I might be living up here for the week. This is diligence. This is how VCs get their hands dirty. They say We don't get our hands dirty, but I'm up here doing it.

MPD: This is why VCs get a bad rap. Okay, here we are. What's up in the venture world?

Mike Rogers: Yeah, so I think like high level, it seems like the market is unsticking a little bit, but the continued uncertainty in public markets is certainly not opening up the venture world the way I thought it would.

Early on into the kind of fall season here, as we got outta the summer months there is some good shines of le light beams of light that are coming through where we're seeing some deals get done. Again, I think it's just a matter. Prices, Venture capitalists expect prices. Founders expect starting to meet at a place where deals get done.

We're seeing seed deals get done sub 10 million. Again, we're seeing a lot of series as get done, Sub 40 million again again, as mentioned in previous conversations, we think this is really healthy for this art environment and for both founders, for both employees and for certainly for investors. On that side, bullish.

For founders right now, what do you do, right? If deals aren't getting done, you're building your company. What can you be doing to put yourself in the best position? And something that we were talking about earlier, and I think it's a great time to be building relationships, right?

It's not reaching out to VCs with a, Hey, we're raising Ask, It's reaching out to VCs with a, Hey, this is what's going on in the business. Do you have 10 minutes or 15 minutes to chat out? I'd love to get your thoughts on what you've about to see in other companies in your portfolio. Do at this stage really reach out, build relationships.

Start to build rapport so that when you do need to raise capital, it's. Wham, bam. Hey, we just met, Let's go from first date to marriage. It's hey, we've been dating. We really get to know each other and we're excited to invest and build a long term

MPD: partnership. We're back in with gravity in the market.

Gravity has returned where you actually build relationships and spend time diligence in companies and get to know people. It might be a new skill for founders that entered in the last two years to be back to this human dimension, to the fundraising cycle. One thing though is man, when you get, you know this, when you get 50 founders a day saying, Hey, you have 15 minutes.

You can't do it. It's just physically impossible and you turn into the bad guy and it feels terrible to say no to everybody. What are some techniques founders could be doing to actually open the door with new relationships to get to know people when they're not in a fundraising cycle? Yeah, I

Mike Rogers: think first and foremost, putting together good, thoughtful update.

Not 25 pages long, Not down to the, contribution margin bullet points, how we calculated this, but just high level, easier to read, quick snippets on why your business is important and why people should be paying attention to it. We talked a couple weeks ago about how to make a good pitch deck and we can dive, certainly spends more time on that.

But what you're trying to do is get the meeting, cater your updates to how do I get the meeting and get people excited about the business so that you can to your. Rise through the 50 people that are also

MPD: asking for those times. I also think another tip for folks out there to get away from the transactional nature of the relationship and look, there's a transaction both sides are aware of.

We get it. Come bearing gifts, right? Reach out and say, Hey, I got a friend who's raising money. Do you want the intro? That's a good look. Yeah. Or totally. Hey, I bumped into this person looking for a new job. People, everyone knows people. Anyone in your portfolio need a really great sales guy.

This guy's awesome, right? Those are, those little nuggets are a great way to start a relationship. And you change. You change it from like across the table to a, Hey, I'm in the startup ecosystem with you. I'm an innovator, I'm building. We're all helping each other. And it becomes more of a pure dynamic, which I think is super healthy.

A hundred percent.

Mike Rogers: Everyone knows that everyone's friends. Everyone's friends are raising money too, right? So it's your exact point. The ecosystem is not massive. It's small. And founders have friends, VCs have friends, everyone has friends and the goal is to, is share and be helpful across the board.

Totally love getting founder intros to other founders, especially when they come from vetted folks may have had a few interactions

MPD: with already back to that startup mantra. The more you give, the more you.

Mike Rogers: Totally. And I think to your 0.4 around founders not being used to being in deep diligence cycles.

I bet you a lot of investors are not used to deep diligence cycles too, right?

MPD: If

Mike Rogers: you're one of these doubt new 500 venture firms that popped up over the last two years, like this might be the first time it's actually taking a month for a deal to go from first meeting to close is actually taking two weeks of calls and diligence and deep information jives.

And I'm sure that's weird for

MPD: some. I think it's an opportunity though, hopefully for them for I'm sure, yeah, everyone has different backgrounds, but if people haven't experienced that yet in prior lives of their current fund now is a good time to slow down. There is something magical that happens Totally.

When you sit with a deal over a weekend or a couple weeks where you're talking to different people, you're looking under rocks. You get, you reduce the variable of human psychology and the emotions of the decision. And I have found that if you let it evolve totally, you'll have less, You'll find you'll end up making better decisions.

Yeah. Less

Mike Rogers: buyers remorse on both sides. We had a founder last week who for the first time said, I'm meeting all the investors in person. He was doing. East Coast trip and if were calling back to two, three years ago, we never did a deal without being the founder in person.

It was unheard of. We all got very used to that mentality during Covid, but I think we're swinging back the other way now where there's time, like it doesn't, the deal doesn't have to get done in two weeks. And Yes, for a founder, it actually does make sense to spend that time in person with your investors to make sure you're building a good relationship.

MPD: Yeah, and totally. And also if you, if investor is a prick, you wanna figure that out. And in person, the body language, there's a lot of benefit. All right, Chris, what do we have this week?

Chris Zhang: Hello, Mark. We have a very interesting week on a global stage in financial markets. First off, let's start from domestically earning chief Q3 earning.

Have started. And what we've seen on a, on average is a stronger expected, stronger unexpected result coming from the banks, the retail sector, and in energy sector, airlines and pharma. That has definitely lifted, it, lifted some of the the sentiment in the US markets specifically. Using, let's say JP Morgan as an example, I always use them.

They're, one of the biggest banks with both retail presence and investment banking presence. What you've seen is a slow down, certainly in their investment banking division, in earnings was compensated by a much higher net interest margins. So to explain that a little bit interest rate in the US obviously has been rising, but banks lend out the money in the longer data part of the curve, so they lend out a higher interest.

And when they borrow, so when they take you deposit, they taken in the money at a fun end part of interest rate. Usually if a check in savings these days it's actually store near zero. So as interest rate goes higher and interest margins goes higher, and that boosted their earnings basically across the board for any banks that have a a retail presence.

What I would say about that is first of all, Whereas not even halfway through the earning season yet and the big texts have yet to come, and it, based on what we've seen so far from a few of 'em, like Snap the picture's not too great. So we'll see what happens next week with Microsoft, Amazon, Apple Alphabet.

I'd urge investor to stay patient at this juncture. Instead of acting too quickly on any sort of positive twist in the. Outside of us we've seen, I think the biggest news for me was this for the past week is China's net 20th National Congress. Investors been very jittery around, around this event and not really sure what and if any sort of unexpected event would happen so far that there have been very few twists that we didn't an.

That's not to say it's good. CJ Ping the General Secretary of China is likely to be appointed in the party's gen as the Gen party's general secretary on Sunday. So tomorrow, this will be an unprecedented third term, which also paves the way for him to be influencing the decision making body of China.

Basically, in per. The one twist I'm I saw coming from actually yesterday's meeting was that the premier Lee is kicked out of the Communist party's standing committee, and he's one of the few people remaining in the entire government body that is at least perceived to not be on the same team as cj.

If you will, the last bit of hindrance to seize rule in perpetuity, that was not good. If you're rooting, if you're rooting for a more democratic society in China, more western friendly Chinese party in China that was certainly not a good news. Investors are also very anxious about China's stance on Taiwan.

Of course, we got the Nancy Pelosi visit, earlier this year, and we got the chi ban. What has come out of the chapter, the National Congress, is that the party has resolute decided to continue to oppose and contain Taiwan's independence. Their stances become firmer compared to.

And further, further from that, in international investors. We're also hoping for some sort of guidance on the ease of Covid 19 restrictions, which has been very punishing to the economy so far. That didn't happen. Now we're expecting the seven day to 10 day quarantine restriction to continue for some while, while into 2023.

All in all, It wasn't a friendly meeting to international investors in China. And and more to come. So I'll urge everyone to pay closer attention to that front. Of course, we've got, away from China, we've got UK with the volatility there triggered by the resignation of the Prime Minister what, I.

More so than stock market, we would, people would pay me, should pay more attention on the treasury market or the guilt market in the uk, 30 year guilds has yet 10 year guilds have broken, 10 per 4% yet again, and 30 year guilts has now coming, slowly but surely grinding back to the highest level.

And that's definitely introduced a lot of volatility to stocks and to the currency market, which then have implications on foreign exchange and sort of exports and import market and the broader economy in general. So that, that, that was the, that's what happened this week.

MPD: God, that's so cheery.

We I'm gonna add on to the fire. Bloomberg had a report. One of their internal models now says a hundred percent chance America's going into a recession, which lines up with everything you've been saying. The stuff in China I think isn't a surprise, but it is terrifying, right? Yeah. Just to put a word on it.

I agree.

Chris Zhang: I don't mean to be a bears on the market, but what I wanna stress is if you look at the history of financial. Every year we've got volatility. Every year we've got uncertainties, but generally it's contained to be on a global stage. At least a couple, two to three. But this year the amount of uncertainties has gone way beyond that.

We're looking at of course, Ukraine war, what's happening in China, what's happening in the us, what's happening in South America. Any of these can eventually blow. To the point where it's it's difficult to be contained. So investors don't like that. So as a result, risky assets around the globe are pricing in the likelihood of a further adjustment and which also in turn could be, could then turn into a prolonged recession back by lower spending quality lower spendings and more sort of supply disrupt.

MPD: So let's take this back to innovation, right down to the private markets. And I love the macro view. Cause obviously we're dancing in a bit of a firestorm right now on a lot of fronts. Yep. But deals are still happening in the venture market. There's a fair bit of activity actually.

Valuations are way down. We're seeing that kind of across the board, particularly in the growth.

How do you think these the macro trend of the market kind of converges in the private market over time?

Chris Zhang: Great question. That's something that's certainly been on my mind. As investors across the entire capital spectrum, I think over time investors will need to first of all digest information and get used to it, and then be more creative in the way they think about.

Instead of focusing on maybe, your vanilla invest straight into, common equities. What I've been thinking about, what investors on that I talked to have been thinking about is to use more maybe complicated structures, maybe introduce a little bit of optionality, introduce a little bit of structured equity that will protect the downside by maybe giving up a little bit of the.

So instead of potentially buying straight into the A's and B's and C'S round directly, we're thinking about potentially using structure equity to anchor and invest into the future rounds at a future rate of valuation, but also get protection on the downside. We just gotta be created there.

There are always plenty of great opportunities in whatever.

MPD: Yeah, we're actively investing. I feel like this is for better or for worse and doesn't always feel great. It is a buyer's market. Yep. It's a good time to be deploying long term capital where liquidity is expected to happen, five to seven years from now and likely a very different dynamic.

The structured equity stuff we are not seeing at the early stage too heavily, which is great. But we are starting to see it at the growth stage where there's been a real contraction in the capital market, even more extreme. And so structured equity for folks listening means there's like triggers.

If this performance number isn't hit, something happens. And so it's an equity investment with a bunch of rules on it, a bunch of red tape, and it has some properties of debt in that. And so it's a it's a very attractive construct for investors cuz it takes risk out. But, there is a point obviously where it's, I think it's too onerous on the companies and the entrepreneurs.

Yeah. And

Chris Zhang: it doesn't just apply to equity market either. We're also at, private debt, for instance, as an extension to our view on the capital structure of the company. And there, of course there are even. Further extrapolations from that. And then as an investor, you wanna explore all these options right now.

But like you said it's good time to, to deploy capital if you're cautious, and be an opportunistic and use, use those sort of more to your own vantage. And it of course is a buyer's market

MPD: yeah. Yeah. I was having a conversation recently with someone that's okay why deploy capital now when a lot of these companies.

That weren't strong are becoming weaker. And my response was, yes, but the companies that, that you don't, those are the ones where they're gonna have trouble raising money, right? Weak companies that become weaker. Right now, it's not gonna be pretty, but strong companies that are continuing to perform and thrive, that are being punished virtually just because of the dynamic of the market.

Those are great places to deploy capital. Those companies can perform now, they'll perform. And they're a great place to continue to support them and their journey. And a great opportunity from an investment perspective to be along for the ride.

Chris Zhang: Exactly. And we're long term investors, right?

Right now as, as volatile as the market has been, it's still only for looking by six months, 12 months. And that is not our investment horizon. And beyond that, it's always difficult to catch the bottom. You don't want to be the one with a job description to to time the bottom.

I, I think if you want to think about this and if you have the capital, if you have the investment horizon that's, it's longer dated, and right now is certainly a time you should be at least thinking about deploying some of the capital. And like you said, to support the good companies that and just be on a, on the same journey that, that they've been.

Yeah it's, I wouldn't definitely, I wouldn't argue against that.

MPD: Thank you, Chris. Appreciate you as always. And for everyone listening, just a reminder, Chris is an s e c registered raa, so nothing he said should be construed as financial advice, Yada, yada, y.

Chris Zhang: Thanks, Mark. See you soon.

MPD: All right, Brett, let's dive in.

What's going on in the blockchain universe?

Brett Palatiello: All right. So I want to talk about the OFAC sanctions. So ofac the Office of Foreign Assets Control essentially what they deal with is with trade sanctions based on foreign policies. They target or they try and avoid let's say any transactions going to terrorists or North Korea, for example.

So what they recently. Was they sanctioned tornado cash which is essentially a tool that allows you to put cryptocurrency into, say a black box, it conceals it, and then you can send it out of that box to other wallets. So it obscures where exactly it came from. And whoever touch tornado cash has now had their addresses essentially blacklisted.

A number of applications that are quote, decentralized have centralized front ends, meaning the websites that you and I interact with in, in Defi. So they're complying with these OFAC sanctions as they probably should. They obviously don't want to get arrested or have to deal with any lawsuits.

But I specifically want to talk about m e, which is maximal extractable value. And what that is, you can basically think of that as arbitrage or the facilitation of arbitrage by validators since they have the power to reorder or accept or deny certain transactions. And flash bots is a piece of software that essentially democratizes MEV for validators.

So it creates an open market for it because there would be a centralization effect of stake if there was a bunch of validators who were really good at extracting me. What they've done is they've created a really great piece of software that allows. Everybody to participate. All the validators participate in mev.

Now the issue is over 58% of all validators use their software called MEV Boost. And they've decided to comply with the OFAC sanctions. So as a result about 53% of all transactions included in blocks. Are complying with the OFAC sanctions. So that means about 47% of validators will include if you're somebody who has your wallet blacklisted.

47% of validators will include transactions that are blocks. And so everybody else, they, they won't include it, but they will app. Additional blocks to the blockchain on top of other transactions that have been blacklisted. So it's not necessarily a big deal if you're somebody who's been sanctioned.

It just means that your transaction will take a little bit longer to go through. But nevertheless, it's it's a slippery slope, right? The base layer Ethereum should be credibly neutral. It should be permissionless and cent ship resistant whi, which it. But again it's something that's one of the core principles of the space to be able to build everything on top of it.

So nobody has to worry about their transactions being censored. How

MPD: delayed are they when you're saying these are a little delayed, is it, are we talking days or hours

Brett Palatiello: or weeks? Depends. At this point it's, it shouldn't be very long. I can't give you an exact number on how long it would take for a sanctioned transaction to get through.

Not very long at this point. But as the number of sanctioned addresses grows, then obviously your chances of getting through get smaller and smaller, and then you have to pay much, much higher fees to the validators who aren't sanctioning. So it becomes very for the people that whose addresses have been sanctioned.

And also it's it's become quite burdensome for a lot of people who interacted with tornado cash. For one specific reason is people are getting dusted, it's called. So if I'm somebody who let's say I'm just a person who likes to disrupt. I can put money into tornado cash and I can decide to say, Okay, Mark, I'm gonna, mess around with you and send you, one E into your account.

So now all of a sudden, your address has technically interacted with tornado cash. So you mark, even though you had nothing to do with tornado cash, Yeah. Now have to deal with a number of different things that people are going through with reporting that you're, basically not a criminal.

So it's it's a very blunt approach to essentially blacklisting these addresses. And this comes alongside some other concerns. Centralization of stake in the network. For example, Lido and Coinbase they run validators and they have a tremendous amount of the controlled stake which may or may not be a big deal.

Some people think it is, some people think it isn't. But it is something that I had written about in my paper, which is, one of the battles of decentralized networks is fighting against these natural forces of centralization, right? Centralizing. Stake or centralizing certain functions can make the market or make the network run more efficiently.

There's economies of scale involved, which causes a natural force of centralization. That's one of the things I highlighted in my paper about the centralization, which essentially is there's a lot of activism involved in maintaining a centralized network. So we're starting to see some of that with some validators no longer using, say, MEV Boost or Flash Box recently came out.

They indicated that they made a change to their software called Suave. The details haven't been released. Which will make censorship hopefully more difficult for validators and allow the base layer to be a permissionless, credibly neutral layer of the internet.

MPD: What's your take on this?

I get where the governments are coming from. If there's black boxes that are explicitly designed for mostly illicit use, putting some friction on that seems. A good policy if you're in that, if you're in that policy role. It sounds like this has affected a lot of people who had no illicit uses as a blanket policy kind of came out of the blue.

What's your kind of take on, is this the, obviously a high friction stepping stone in a path towards a more balanced equilibrium between regulation and this platform? Or is this just regulators not getting it and doing something aggressive, which.

Brett Palatiello: I think it's a, I think it's a combination of the two.

I don't think first of all, I think OFAC either unwillingly didn't look into how tornado cash worked and what the ramifications were for people getting dusted, for example. Or they just didn't care because their job is to mitigate any let's say transactions that, $600 million going to North.

So not the vast majority of people in the u in the United States have no idea what tornado cash is. They don't use it even the people at crypto, right? Probably a lot of people don't use it. So for them it was $600 million to North Korea, which everybody can relate to, right?

We'd probably rather not that, not happen. Versus, shutting down some application that a very niche subset of people use. So I agree that we're starting to see an equilibrium play out between regulators and the application layers and the protocols in crypto.

But what a lot of people are concerned with is the potential to further increase ofac. Reach which includes at the protocol base layer. Applying these things a blacklist directly on chain. Which everybody has to adhere to. It it's a slippery slope and I think a lot of people are nervous that a OFAC may have not have realized what they had done and, all the collateral damage that, that it caused to a lot of innocent people.

Or they just didn't care. And they're just trying to protect whatever national interest. Regardless of, any potential innovations that could be had here. I think a lot of people are welcoming of some sort of regulation but they're worried about potential overreach into into the space and how it could stifle innovation.

I is the

MPD: crypto community, the blockchain community In conversation with groups like ofac, yet, are there lobbyists or trade groups or. Is OFAC hiring people from this community to with that expertise? Is that information bridge gap being bridged or where are we in this process of the natural evolution of making this kind of a mature, respected thing?

Yeah.

Brett Palatiello: Yeah, so there's yeah, there's a very big presence of crypto in DC in terms of anybody crypto related, let's say getting hired into OFAC or, anybody in Congress that's not clear to me, but there is a very big push to, obviously educate regulators on what exactly this technology.

Relate it to, to things that currently exist. For example http HyperX transfer protocol is something we use every day on the internet, right? We see a HTTPS on our websites. That's a protocol, but every time something that uses HTTPS for some criminal activity, they don't sanction http the protocol, right?

They'll sanction the website, they'll sanction the people behind it. But. Target http per se. It should be a neutral base layer upon which you know, a certain way things are done. But we are starting to see like Coin Center fight back with their own lawsuits against against regulators.

For example a lot of people that got dust. Have filed a class action lawsuit saying that basically they had never interacted with this site. And now one person, David Hoffman in particular said that he needed to basically for the rest of his life, every year fill out a form to assure them that he's not a criminal.

That's quite burdensome for somebody who basically got dusted inadvertently, by somebody just causing chaos.

MPD: Yeah, good on OFAC for trying to solve real world problems. Hopefully there's a more equitable way to do it. Yeah. I

Brett Palatiello: agree. And I, I think regulation is needed, and I think it's important for the space to move forward, especially if we're gonna go towards mass adoption.

But I think applying sort of the block tools we have our, at our disposal now, or any regulations that apply to, let's say, existing markets I think those should be adapted to idiosyncrasies of crypto. And, we're starting to see some of that coming out of Congress that they're willing to be a little bit reasonable, but there's certainly some work to.

MPD: Thank you Brad. Very helpful. Appreciate your insights. All right, Fong, what do you have for us this week?

Phuong Ireland: Hey Mark. How are you? Hi everyone. So today I wanted to talk about co-founders and whether or not you need one for your startup. So two of the companies that we have in the incubator right now, were started by sole founders and based on where they are, we're having a lot of conversations around whether they need co-founders and if so, what the profile should be that we're looking for.

This is something a lot of people think about when they're starting out and sometimes well into the life of their businesses. There are actually a lot of arguments that can be made for and against having a founding team. Just looking back on my own experience, I can't imagine going thr